“This is
a decision we’ve thought long and hard about and confident that it’s the right
path for Micrsoft and Yahoo,” Ballmer said on a conference call with financial
analysts and press.

The
problem with that statement is Yahoo is already second to Google in search and
online advertising, and has shown some promising signs of life in terms of
advancing the state of the art in contextual and mobile search.

Microsoft,
on the other hand, is the third largest search engine by traffic and has made
gains in traffic volume at the expense of both Yahoo and Google. However, its
single-digit market share is nothing compared to Google’s massive market
footprint.

Microsoft
is placing a giant bet that acquiring Yahoo will catapult it into a better
competitive position against Google. The company that brought us Windows Vista,
Outlook and SQL server will empty its war chest of $23 billion and hand out a
near equal amount in its common stock to buy the failing Yahoo. The risk may be
worth the reward since, according to Microsoft, the online advertising market
will double by 2010 to $80 billion annually—most of which is currently owned by
Google.

Microsoft
executives could barely contain their excitement during the conference call
announcing the proposal. While PR people read all the safe harbor and forward
looking statements required by the Securities and Exchange Commission, it was
pretty clear that the Microsoft team was already taking measurements for new
carpets and drapes for the Yahoo offices in Sunnyvale, Calif.

Ballmer
said he spoke with Yahoo CEO Jerry Yang on the eve of Microsoft’s announced takeover
and admitted that Microsoft has been courting Yahoo for the better part of 18
months. However, he stopped short of characterizing Yang’s sentiments.

How does
Yahoo feel about this marriage proposal? Yang and company are mum. In a
statement, Yahoo said, “its Board of Directors will evaluate this proposal
carefully and promptly in the context of Yahoo!'s strategic plans and pursue
the best course of action to maximize long-term value for shareholders.”

Yahoo may
be having a hard time keeping up with Google in online advertising and search,
but it’s Microsoft that needs this deal. As Google presses into
applications—from consumer to enterprise apps—and continues to dominate the
search market, Microsoft is endanger of being disintermediated.

The fact
that Microsoft and Yahoo have been dancing around each other for 18 months
shows Microsoft wanted to build its own market rather than going the
acquisition route. One of the steepest challenges Microsoft faced was building
an infrastructure that had the speed and capacity Google currently enjoys.

According
to analysts, Microsoft needs 500,000 servers around the world to effectively
compete with Google. Microsoft is building massive data centers in Washington state and Siberia, but its infrastructure build out
efforts have been stymied by a painfully slow deployment process. According to
one analyst, Microsoft discovered that it could only effectively install and
provision 5,000 servers a month. That may seem like a lot, but the pace puts it
at 10-year build out schedule after which it would still be behind Google.

"The
combined assets and strong services focus of these two companies will enable us
to achieve scale economics while reaching R&D critical mass to deliver
innovation breakthroughs," said Kevin Johnson, president of the Platforms
& Services Division of Microsoft. "The industry will be well served by
having more than one strong player, offering more value and real choice to
advertisers, publishers and consumers."

Is that
worth the 63 percent premium that Microsoft is paying for Yahoo? Microsoft’s
critics charge that these acquisitions reflect Microsoft’s desperation to find
an answer to its Google problem since its paying premium prices for these
companies. According to the Wall Street Journal, Microsoft is paying 48-times
Fast’s estimated 2010 revenue. Likewise, the newspaper reports, Microsoft paid
a whopping 85 percent premium to pick up aQuantive after losing to Google in
the race to acquire DoubleClick.

Microsoft
believes an immediate $1 billion in new revenue will result from the synergies
created by the merged companies. Looking forward, the company believes it will
break even on the acquisition costs in the second year after the completed
merger.

Will this
be enough to slow or stop Google? Probably not.

Yes, Ballmer is correct that
advertisers and content publishers want an alternative to Google for
competitive reasons. Yes, Google needs to improve its customer service and be
more responsive to its constituents. But, to Ballmer’s point about the need for
an alternative, is it better to have two dominant online advertising machines
than the three we have today?

As Microsoft has proven time and again on the
Windows desktop, it’s hard to dislodge a dominant player who has a superior
business and marketing plan.

Lawrence Walsh is editor of Baseline magazine, overseeing print and online editorial content and the strategic direction of the publication. He is also a regular columnist for Ziff Davis Enterprise's Channel Insider. Mr. Walsh is well versed in IT technology and issues, and he is an expert in IT security technologies and policies, managed services, business intelligence software and IT reseller channels. An award-winning journalist, Mr. Walsh has served as editor of CMP Technology's VARBusiness and GovernmentVAR magazines, and TechTarget's Information Security magazine. He has written hundreds of articles, analyses and commentaries on the development of reseller businesses, the IT marketplace and managed services, as well as information security policy, strategy and technology. Prior to his magazine career, Mr. Walsh was a newspaper editor and reporter, having held editorial positions at the Boston Globe, MetroWest Daily News, Brockton Enterprise and Community Newspaper Company.